TalkTax

An EY global survey, highlighted in a recent article in the Sydney Morning Herald indicates that increases in audit activity are part of a broader global trend.   The paper writes:

An annual survey by the global accounting firm Ernst & Young found tax authorities are becoming more aggressive and forcing companies and governments into more clashes over tax laws,  The survey, based on interviews with 541 senior tax and finance executives, concludes that the world has entered a period of elevated risk for tax controversy.  Findings were that audits are more frequent and aggressive, making them more costly to defend or litigate.  Tax assessments and penalties have now entered the realm of billions of dollars.  Companies [also] face unprecedented scrutiny and reporting of their tax affairs by advocacy groups and the media.

Tax authorities have become significantly more assertive in examining cross-border activities.  The volume of tax information exchange agreements has increased by more than 1000 per cent, while joint and simultaneous tax audits have gone from concept to reality.

… Because of these changes, 77 per cent of respondents [to the survey] said managing tax risk and controversy would become even more important to them in the next two years; this figure increased to 88 per cent for large companies. The increasing focus on managing tax and controversy is mirrored in tax directors’ future appetite for risk – 92 per cent say they will either stay the same or become more risk averse in the next two years.

In this modern era of collective fiscal belt tightening it is not a great surprise to see Governments looking to squeeze more revenue out of the existing tax base.   A large corporate taxpayer is an easy target in a modern-open democracy; corporations don’t vote and it is difficult to find anyone who cares very much when they get their b*tts kicked (apologies to Milton Friedman).

While an  increase in audit activity may be a convenient way to generate more revenue in the short term, it can also have a long-term negative impact that is harder to measure: shifting the goal posts creates uncertainty for taxpayers with resulting  increases in compliance costs.  Uncertainty discourages transactional activity at the margin.  The latter might be thought to be a good thing if it discourages aggressive tax planning, but consider how much economic activity would slow down if cautious taxpayers brought every transaction with a tax benefit to the Inland Revenue for prior approval.  There is a tremendous efficiency in a self-assessment tax system – relying on audit activity to generate revenue undermines the certainty taxpayers need to self-assess.  At the extreme, attacking otherwise compliant transactions with an anti-avoidance rule reduces the incentives to comply in the first place.  As Brendan Brown (R McV) put it at a recent IFA conference; “they are going after the guys at the wrong end of the compliance pyramid”.  Say whatever you like about tax avoiders – they have at least made an effort to comply with the rules.

Relying on audit activity to raise revenue results in an uneven application of tax laws and an unhealthy reliance on officials to get it right.  Significant damage is done to the rule of law and integrity of tax system if users perceive that the rules are being unevenly applied:  the difficulty that countries like Italy and Greece now have in collecting tax revenue is at least, in part, a product of the citizenry’s distrust that revenue officials will apply the rules fairly and proportionately.

Ultimately there is the risk of capital (and intellectual) flight as taxpayers and their ideas go in search of friendlier jurisdictions that offer not only lower tax rates but simpler tax systems with clearer rules that are easier to comply with.  There are a significant number of countries in Asia, throughout the Middle East, South America and even in Europe that are not experiencing the same kind of fiscal pain currently gripping western Europe.  Many of these countries are focussed on developing a sensible, transparent and certain tax regime – rather than squeezing more revenue out of a shrinking tax base.   The economic success of Singapore and Hong Kong is built on this kind of strategy.  Recent changes to our CFC rules make it even easier for taxpayers in New Zealand to enjoy the benefits offered by such jusridictions.

There is a general understanding in the advisory community that we will have to live with an up-tick in audit activity for a while yet – but there is also the hope that this increase in activity will taper off in the short term as the revenue puts renewed emphasis on engaging with the profession to agree the parameters of acceptable tax planning so that we can all live within these self-imposed limits.

See article at: http://www.smh.com.au/business/business-circles-the-wagons-against-governments-fight-to-increase-tax-revenue-20111120-1np8n.html#ixzz1eOFCPt45