Typically, tax controversies are unexpected and can require enormous amounts of unplanned time and resource for already stretched tax functions to resolve. And if not managed effectively, businesses can face increased tax liabilities, penalties and, in some cases, reputational damage.

“Often, the true cost of managing tax controversy isn’t easy to calculate,” says Partner Paul Dennis, the Deloitte UK Tax Controversy lead who has spent his 25-year career resolving disputes. “When you add the resource commitment of multiple teams around the world responding to revenue authority audits to the cost of advisors, it can be a significant investment. However, there isn’t always a clear global strategy to improve governance, reduce costs and achieve better outcomes.”

The top trends shaping our landscape

Deloitte surveys and client feedback have identified several trends that are changing how functions handle tax controversy:

1. The unprecedented pace of regulatory change globally presents a challenge in managing new and evolving tax risks.
2. Revenue authority audits are becoming more regular and rigorous, causing challenges with resourcing audits effectively.
3. More data requests and sharing of information across revenue authorities can lead to multiple territories holding data shared with one authority.
4. Greater stakeholder interest and transparency in the tax contribution of multinationals can lead to reputational damage.

These four trends all increase the importance of developing a global strategy for the management of tax controversy.

The foundations of effective tax controversy management

For organisations embarking on a journey to develop a global tax controversy strategy, what are the key elements? Paul believes there are four essential building blocks.

Governance

The first step is establishing clear governance over the management of audits. Protocols for reporting new audits, criteria for determining who manages them within the organisation, a policy governing the use of advisors, and outlining what happens if any of the criteria change during an audit, are essential. To ensure there is clear accountability, a RACI can help so that it is clear across each territory, and for each tax or duty, who is responsible, accountable, consulted and informed of each and every audit across the business.

The nature of how revenue authorities audit businesses varies significantly; some adopt co-operative compliance regimes with more real-time and informal dialogue whereas others have more formal audit frameworks.  The governance framework should clearly articulate how “audit” is defined and whether it includes both informal and formal engagement with revenue authorities.

As businesses generally do not know when an audit will arise, it can be difficult to provide assurance that any policy is being adopted correctly and consistently across the whole of the organisation. Crucial to ensuring governance of the management of audits is that a control process is in place to provide confidence that the framework is being followed in every audit.

Visibility

The next building block is visibility. A central view of all global tax risks and audits helps to quickly identify emerging issues across the business and spot if similar requests have been made in multiple territories.

While full visibility of all audit activity is a crucial element for an effective tax controversy strategy, there is a challenge in ensuring that data is complete and correct. Unlike tracking a reporting obligation, such as the filing of a tax return, there is uncertainty of when an audit will arise. Furthermore, a routine audit involving the provision of data could quickly evolve into a more complex technical dispute and the tax at risk increasing. As flagged already, this is why governance is key and ensuring that controls are implemented to not only provide confidence that all audits are included in any tracker but that any changes in scope and scale are quickly reported.

As part of an effective tax controversy strategy, businesses will often embed a global process owner into the framework who regular validates that data is correct and up to date.

The combination of a clear governance process, with accurate data insights on tax audits, makes it easier to identify where the next building block - technology - can be employed globally to deliver better outcomes.

Technology

Surveys suggest tax audits are becoming more rigorous in their approach, and requests for data and information have become more onerous.

Unstructured data, such as emails, messages, pdfs and slide decks, can be challenging to identify, extract and review. For many years businesses, advisors and revenue authorities have used eDiscovery platforms to help with large data reviews.  Whilst eDiscovery platforms provide the ability to review data in a systematic way with an audit trail, there will still be the need for significant human review. However, with the advent of artificial intelligence, the capacity to reduce the manual review time and increase accuracy is helping to accelerate data reviews and provide more assurance.

The use of data gathering and review technology not only enhances the approach to managing audits, it also helps to create dynamic data repositories. With global revenue authority documentation in one place, data technology tools can be used to translate correspondence into the native language and be reviewed to identify similar issues that have been addressed around the world.  This can ensure a consistent response and reduces the resource required to answer similar questions, multiple times, from different revenue authorities.

Turning back to visibility, sophisticated tax audit tracker technology can also provide data insights to help plan and manage tax controversy more effectively.  Centralised dashboards can provide a huge range of insights including the nature of the dispute, tax at risk, amounts provided for, resource invested in the enquiry, the stage reached and full details of the outcome.

Expertise

The final building block is expertise. The previous three elements of the tax controversy strategy focus on the value that can be extracted from greater centralisation and governance. However, the right local expertise can also be vital.

When building the right team to respond to tax controversy, skills to consider introducing are as follows:

• Strategic – insights on how the revenue authority approaches audits, how similar risks have been addressed with other businesses, routes of escalation if challenges are experienced, and the opportunities to resolve disputes in the most effective way (for example, whether mediation is available to reach a settlement).
• Procedural – awareness of the mechanics of the statutory framework under which the audit is being conducted, both to ensure that all obligations are met and the revenue authority is not acting outside of its powers. These include time limits for assessments, penalty frameworks and appeal processes.
• Technical – deep expertise of the risk being audited and how the relevant legislation is being applied across the sector.
• Legal – knowledge of the litigation processes and expertise to deliver the appropriate strategy.

A clear policy detailing when (and which) advisors should be engaged to bring additional expertise helps to ensure the right team with the right skills is deployed on each audit.

Outside of individual audits, regular training to understand industry and country trends helps the global tax function to be aware of areas at risk of challenge and to build an effective defence.