The theme of the talk was: • no surprises when it comes to tax; • do not expect a tax manager to know everything; • be prepared for a tax audit; • make sure that you budget expenditure for the appropriate tax risk reviews; • calculate the total amount of payroll, corporate and other taxes you pay and you'll be surprised to see that it makes a substantial expense amount on your profit and loss statement; • play the game and know the rules;
A recent OECD report shows that in Europe tax authorities in the last tax year conducted verification audits to the value of US$ 45 billion. The total number of tax disputes outside Germany in Europe totals 1 million. Large tax units have also been created by various tax authorities to tax large businesses. The percentage collection of these LTU’s, out of the total additional tax collections, can be summarized as follows:
• 9.5% in Romania;
• 9.8% in Hungary;
• 14.3% in Italy;
• 71.2% in Germany;
• 46.7% in the United Kingdom;
Corporations in Europe can expect that tax authorities will “throw more mud than before to see what sticks”. In order for these corporations to ensure that most of the mud does “not stick”, more resources and management of the verification audits, which may become tax disputes, will have to be undertaken. Tax risk management processes will include frequent tax risk reviews prior to a tax audit taking place, and a process of lobbying and engaging on a regular basis with the LTU’s in the various countries. Many corporations are not doing this.
What is the crux of the problem?
EBITA and the ranking of tax. This appears to be one of the main problems. Earnings before interest, taxes and amortization. Senior managers are usually measured on their performance according to EBITA. Tax does not feature in this formula. This results in no real focus on managing tax risk as effectively as, for instance, sales and distribution. Unless, of course, there is a surprise tax authority visit - then it is too late. This causes a ranking problem with financial directors in that tax risk is not ranked as a high as a priority. This is a big mistake.
A further problem is that tax managers within these large corporations may be very well skilled in tax technical issues. However, they are not trained tax lawyers. They have little understanding of the rules of evidence. This means that concepts such as onus of proof, standard of proof and what evidence is ultimately acceptable in a court, throws these individuals off when tax authorities challenge them on the proof they produce at the time of an audit.
In order to give these tax managers the necessary confidence, and in order to prepare them properly for a tax audit, is absolutely essential that a tax review process takes place where the evidence at hand and available in the corporation is carefully scrutinized under the supervision of a tax trial lawyer, working with the tax manager before a tax audit – preparing that tax manager. This is not some process whereby the individual simply looks through a bunch of documents. It also entails going into the corporation and interviewing the personnel who operate in the various divisions of a business unit. It is then established what are the status of their archives and records. The tax risk management process prepares the tax manager for a tax audit.
The results are usually staggering. It is not unusual that in any given situation the tax risk that emerges in such a process is sometimes as much as three times more than any tax provision that was created. This does not mean that corporations should shy away from the process. Once a corporation knows what its potential tax risk will be, it is then able to put into play a specific staged plan of action to help root out the tax risks, and in most instances to drop the tax risks to less than the original provisioned amount. Unless corporations are aware of what these tax risks are, they cannot do anything to reduce them.
For more information on this topic, please look out for the various publications that are available for download on this site. Also look out for the various workshops that are on offer. In addition to this you can make contact with Daniel Erasmus at firstname.lastname@example.org.