The Tax Controversy guide provides expert legal commentary on key issues for businesses. The guide covers the important developments in the most significant jurisdictions.
Last Updated: May 24, 2019
Undoubtedly, the management and control of tax risks is a primary goal for both tax authorities and taxpayers. For the former, it is disastrous if the State is unable to collect the expected level of revenue. For the latter, tax is a significant cost for business and a wrong estimation can jeopardise a company’s level of profitability and damage its reputation, not to mention cause egregious disadvantages and losses.
Inevitably, no one can anticipate and eliminate entirely the potential and adverse situations that lead to disputes. Although disagreements may emerge suddenly and in relation to all type of taxes, the majority of reports refer to the many international, complex and controversial substantive tax matters around BEPS, State Aid, digital taxation and the use of the general anti-abuse rule (GAAR) to challenge cross-border transactions, although many of them cannot ascertain whether these have so far contributed, or not, to an increase in the level of tax controversies.
The tax authorities of each jurisdiction might have different perceptions and approaches on how to combat non-compliance with tax obligations or tax avoidance. Nevertheless, they are all undoubtedly better equipped and prepared, with substantial information at their disposal about taxpayers, as well as their own activity, and they are much more integrated internationally.
Perusing the reports, we notice that taxpayers, even multi-national enterprises (MNE) and high net worth individuals (HNWI), are often caught in the crossfire created by the competition between states for capital and investment, and suffer from a changing and uncertain compliance landscape. It is therefore extremely valuable to know how to anticipate, prepare and manage possible audits or to verify whether it is possible to eliminate or mitigate the risks, either before or during a specific controversy.
This guide presents an excellent overview of the main aspects of tax controversies that are common and distinct in 25 jurisdictions, but also provides a very interesting global analysis of trends: the origin and causes of tax controversies; the continuous efforts to combat tax avoidance and evasion; the means to mitigate and manage tax risks and to be aware of the best ways to settle the cases; and, finally, strategies in the context of an administrative or judicial litigation.
The reader will also be able to gather comparative information on all the phases of tax litigation in each jurisdiction, either in domestic or cross-border disputes, and will be able to garner an idea of costs and statistics in the ambit of tax litigation, including the number of cases and the likelihood of successful outcomes for tax authorities and taxpayers.
It is clear from all chapters that tax authorities are collecting more and more information concerning taxpayers, and their businesses and cross-border activities (either through exchanges of information and mutual assistance or through the CbC reports, CRS or other mechanisms or groups – JITSIC). Whether one is in the UK, China or Brazil, the tax authorities now know more than in previous years. However, given the specific circumstances, culture and approaches in each jurisdiction, there is no unanimity as to whether this has been leading, or will lead, to an increase in tax controversies.
According to the country reports, it seems that some tax authorities are investing in minimising tax disputes, either helping taxpayers effectively via direct contact or through the use of alternative dispute resolution mechanisms. It seems that this open approach pays off, considering that when litigation occurs the tax authorities claim a higher success rate before the tax tribunals or higher courts, such as the UK, New Zealand or Switzerland reports emphasise.
In countries where the tax authorities seem more reluctant to invest in assisting taxpayers dealing with complex legislation and ambiguous matters, additional tax assessments grow significantly, which also gives rise to an increase in the number of controversies. Unsurprisingly, this reflects negatively on how investors evaluate the “tax element” when researching the different aspects of doing business in that specific jurisdiction, as the Brazilian report suggests. In these countries it is more common for courts to rule in favour of taxpayers.
The tax legislation and the tax authorities’ approach in some other countries, meanwhile, seem to occupy a middle ground between the types of patterns described above. Statistics regarding the success of the tax authorities in litigation seem to be in line with this, for instance in Portugal or Spain.
Efficient ADR mechanisms may also be very helpful in preventing/reducing or at least resolving disputes quickly, as the Portuguese domestic arbitration system shows, but the administrative attitude and the taxpayer culture still seem to be the crucial key elements, ie, without a willingness on the part of both the authorities and taxpayers to work collaboratively, and with reasonable alacrity, ADR mechanisms may not be sufficient.
This guide also illustrates the way tensions may be avoided as they arise and may evolve from tax audits up to the higher tribunals, either under administrative and civil discussions where anti-avoidance rules, including transfer pricing, still play an important part, or in the context of tax evasion or fraud, involving dishonest conduct and false accounting, for instance, when such matters will usually be treated as crimes, and where the proceedings and the investigations are conceptually separate and evolve independently - explaining the differences, the possible interactions between tax assessments and tax infringements and the possibilities to reduce fines and/or to initiate and conclude settlements.
At the same time, the reader is guided by each author through different geographies along the administrative and judicial routes, from the first to the later stages (that is, considering administrative hierarchical or judicial appeals), considering deadlines, intricate proceedings and rules and principles that reveal how disputes may be settled in the most appropriate manner.
Despite the existence of absolutely different procedural rules and ways to settle tax disputes, we observe important common features that contribute to taxpayers’ best interests, which are stressed by the majority of authors, such as: a) the importance of being prepared before an audit has even started and of being assisted by the legal adviser from the first hour; b) the need to be fully conversant with all the relevant facts around the potential controversy and to evaluate the risks and associated contingencies in order to minimise them; c) supporting the facts and bolstering the substance of the case, disclosing documentation and engaging expert assistance, or any other; d) verifying if the dispute may be narrowed, either by settling or abandoning any of the issues, but making wise use of all procedural and material rights; and e) the importance of an awareness of previous case law, even in civil law jurisdictions where precedent does not have the same strength as in common-law systems, an importance that increases with the need to know international jurisprudence from the ECJ or the European Court of Human Rights and even being aware of comparative jurisprudence or doctrine.
Naturally, in-depth analysis of the case, its facts and the applicable rules of law, is crucial to mastering tailor-made strategies for individual cases, as the reports emphasise. The reader will certainly understand that, in spite of globalisation and of similar concepts/substantive tax issues (such as transfer-pricing matters or hybrid mismatches or re-characterisation issues or cross-border disputes after BEPS) or procedural rules and principles, the way disputes may best be settled in each country is still by the expertise and art of the practitioners in the respective jurisdiction.
The different reports also emphasise the use of domestic or international tools such as the Mutual Agreement Procedure to solve cross-border disputes, indicating how they usually interplay. Some of the reports already allude to the Multilateral Instrument (MLI), although the ratification process is still under way in the majority of the countries.
It is also interesting to observe that the GAAR and SAAR (Specific Anti-Abuse Rule) in a treaty context have already been challenged in several court cases, for instance, in Canada, New Zealand and Italy, and several other reports observe that the confidence in the compatibility that the tax authorities and states seem to stress (these days, along with the OECD MC commentaries) is not shared by many taxpayers and is still not applied worldwide.
The fight for income from international taxation that ignites intense discussions, with taxpayers, but also among different tax authorities and states, and the appearance of so many new tools and weapons to combat tax avoidance, allows us to predict that tax disputes will increase, unless a great investment is made in assisting taxpayers on a daily basis and in creating ADR mechanisms.
Considering that every move takes time and that the state of the art in each jurisdiction is at a different stage of development, the present guide is an excellent tool for professionals – tax lawyers, barristers, and in-house lawyers, but also company CFOs and members of their departments, tax consultants, judges, or other professionals – to provide a compass in finding the right path when preparing and handling a tax audit or controversy; either to assist in managing a good settlement or, if this proves unworkable, conducting a successful dispute.