The Tax Controversy 2023 guide covers 32 jurisdictions. The guide provides the latest information on causes of tax controversies; tax audits; administrative litigation; judicial litigation, including appeals; alternative dispute resolution (ADR); administrative and criminal tax offences; cross-border tax disputes; international tax arbitration options; and costs/fees.
Last Updated: May 18, 2023
A Global Overview of Tax Controversy in 2023
Uncertain times continue
Great unpredictability in recent years has had a clear impact on the global economy and financial markets, both now and for the years to come, on states’ budgets and on the legal environment.
Given the ongoing pandemic situation, although it is less severe in much of the world, governments have adopted unprecedented measures, along similar lines, to protect the health of individuals and to sustain their economies, whilst supporting families and companies to enable them to resist the economic slowdown.
Aside from its considerable impact on the lives of millions directly affected by it, the conflict between Russia and Ukraine is increasingly affecting the global economy and financial markets, resulting in increasing prices for energy and other products, a rise in inflation and global supply chain disruptions.
All these events and circumstances have a huge impact on budgets, on taxes and, given the additional stress put on the different players, probably (more than possibly) on controversies in the years to come.
During recent years, governments have been supporting individuals and companies in need with measures that postpone tax payments or embrace flexible approaches towards compliance with specific obligations. Public spending has increased substantially, and the pandemic crisis and the Russia/Ukraine war are expected to leave the world deeply in debt. The situation is naturally different in each country, but some fear new taxes will be created and, at the same time, predict that the tax authorities will be inclined to be stricter and/or carry out more extensive audits.
More than ever, 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 an incorrect estimate can jeopardise a company’s level of profitability and damage its reputation, not to mention cause egregious disadvantages and losses. However, it is now almost certain that, in the short term, debt and public expenses will increase while tax collection levels will drop due to the economic contraction.
It might be debatable whether, as some have argued, taxes are a prime mover of history, but one cannot ignore facts. The US experience after the 2008 crisis, when both tax authorities and MNEs were in need of revenue and neither was prepared to compromise easily, should be borne in mind. Currently, it seems that the IRS, as well as several other tax authorities, is focusing more of its attention on international tax issues and, more specifically, transfer pricing. It is interesting that, due to a lack of resources, there is a move towards concentrating activity under a new strategy: the “campaign”, whereby the IRS’s Large Business and International Division selects a tax issue for audit, rather than auditing every potential issue on a taxpayer’s return.
Anticipated increase in tax litigation
Inevitably, no one can anticipate and eliminate entirely all adverse situations that might lead to disputes. Although disagreements may emerge suddenly and in relation to all types of taxes, the majority of chapters in this Guide refer to the many international, complex and controversial substantive tax matters around the BEPS Recommendations, including the adoption of Pillar 2 and the legislation created thereafter, the MLI, digital taxation and the use of the general anti-abuse rule (GAAR) to challenge cross-border transactions, although many contributors cannot ascertain whether these have contributed to an increase in the level of tax controversies. But many authors are already anticipating more litigation. The same expectation exists with respect to the impact of the EU Mandatory Disclosure Directive (DAC 6), and many jurisdictions within the European Union have mentioned this possibility.
Several chapters suggest that the amount of new legislation everywhere, and the appearance of new and open concepts applied worldwide in the context of states struggling for financial resources, create an expectation of increased litigation.
It is yet to be seen how domestic legislation will implement Pillar Two (and probably whether new Conventions, EU Directives and domestic legislation will also be necessary for the adoption of Pillar One in the future), and if this will effectively contribute to mitigating tax disputes.
The recent new international instruments, such as DAC 6 and the MLI, are still expected to have a significant impact on how anti-abuse rules will be applied, which will probably increase litigation.
The tax authorities of each jurisdiction might have different perspectives on and approaches to combatting non-compliance with tax obligations or tax avoidance. Nevertheless, they are all undoubtedly better equipped and prepared, with substantially more information at their disposal about taxpayers as well as their own activity, and they are much more integrated internationally, as several chapters mention.
Audit strategy and the road ahead
Perusing the chapters in this Guide, it is noticeable that taxpayers – even multinational enterprises (MNEs) and high net worth individuals – 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 for and manage possible audits or to verify whether it is possible to eliminate or mitigate tax risks, either before or during a specific controversy.
This Guide presents an excellent overview of the main aspects of the tax controversies that are common and distinct in 28 very different jurisdictions, from Austria to Egypt and the USA but also covering several EU member states, China, Israel, Japan, Malaysia, South Korea, New Zealand, the UK and several south and central American countries, among others. It provides a very interesting global analysis of trends, including:
The reader will also be able to gather comparative information on all the phases of tax litigation in each jurisdiction, in either domestic or cross-border disputes, and will be able to garner an idea of costs and statistics in the area of tax litigation, including the number of cases and the likelihood of a successful outcome for either the tax authorities or the taxpayers.
International tax authority co-operation
It is clear from all the 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 country-by-country (CbC) reports, the common reporting standard (CRS) or other mechanisms or groups (eg, the Joint International Taskforce on Shared Intelligence and Collaboration). The reporting obligations foreseen in DAC 6 will also soon be automatically exchanged in the EU. Whether one is in Italy, China, Brazil or the USA, the tax authorities now know more than in previous years. 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, but several assertions and hints suggest it will, at least in some countries.
Litigation and tax authority approaches
According to the chapters in this Guide, it seems that some tax authorities are investing in minimising tax disputes, either helping taxpayers effectively via direct contact, through tax rulings 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, as emphasised by a few chapters.
In countries where the tax authorities seem more reluctant to invest in assisting taxpayers dealing with complex legislation and ambiguous matters, additional tax assessments have grown 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. The case of Brazil seems to be an example. In these countries, taxpayers can prevail more often.
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.
Efficient ADR mechanisms may also be very helpful in preventing/reducing disputes, or at least resolving them quickly, as the Portuguese domestic arbitration system shows. But the administrative attitude and the taxpayer culture still seem to be the crucial elements – ie, without a willingness on the part of both the authorities and the taxpayers to work collaboratively, and with reasonable alacrity, ADR mechanisms may not be sufficient.
Criminal tax controversies
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 through administrative and civil discussions where anti-avoidance rules, including transfer pricing, still play an important role, or in the context of tax evasion or fraud – involving, for example, dishonest conduct and false accounting – when such matters will usually be treated as crimes, and where the proceedings and the investigations are conceptually separate and evolve independently. The Guide explains the differences, the possible interactions between tax assessments and tax infringements and the possibilities to reduce fines and/or to initiate and conclude settlements. In some countries, we notice that there is an increased risk of criminal liability, not only for the taxpayers themselves but also for the so-called facilitators.
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 final 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, there are several important common features that contribute to taxpayers’ best interests, which are stressed by the majority of authors. These include:
Naturally, in-depth analysis of a case, its facts and the applicable rules of law is crucial to mastering tailor-made strategies for individual cases, as this Guide repeatedly emphasises. The reader will certainly understand that, in spite of globalisation and similar concepts/substantive tax issues (such as transfer pricing matters, hybrid mismatches, recharacterisation issues or cross-border disputes after BEPS) or procedural rules and principles, the way disputes may best be settled in each country is still part of the expertise and art of practitioners in the respective jurisdictions.
The different chapters also emphasise the use of domestic or international tools, such as the mutual agreement procedure, to solve cross-border disputes, indicating how they usually interact. Some of the chapters allude to the MLI, considering that it is already in force in several countries, and provide an idea of the crucial matters.
The issue of state aid disputes involving taxes naturally does not apply to all jurisdictions, but within the EU it is a hot topic to which member states and taxpayers should pay great attention for its practical impact on sensitive matters (where exemptions and incentives could be withdrawn and turnaround in the recovery of taxes and interest is a real possibility), as some of the EU chapters show.
It is also interesting to observe that the GAAR and specific anti-abuse rule (SAAR) application in a treaty context have already been challenged in several court cases. However, the majority of chapters choose to stress the confidence in their compatibility that the tax authorities and states have repeatedly invoked (along with the OECD Model Tax Convention commentaries), suggesting that taxpayers should – if not must – adopt conservative approaches to exploiting double taxation treaty opportunities. The MLI also contributes to changing the situation, particularly considering the “saving clause” (Article 11).
The fight for income from international taxation ignites intense discussion, not only among taxpayers but also among different tax authorities and states. The appearance of so many new tools and weapons to combat tax avoidance allows us to predict that tax disputes will increase, unless great investment is made in assisting taxpayers on a daily basis and in creating ADR mechanisms. Ironically, it seems that, at the same time that an avalanche of new measures have been created to combat taxpayers’ abuses (BEPS, DAC 6, etc), states have felt the need to create quick arbitration mechanisms to settle tax disputes between themselves (eg, the MLI and the EU Arbitration Directive).
Authors from several jurisdictions predict stricter audits and additional tax assessments in the near future, and possibly even more taxes. Once the Russia-Ukraine conflict (although predictions of its conclusion are still pure speculation at this point) recedes, however, the authorities will have to consider the approach to “recovery”, when states will want to preserve their business sectors considering the need for long-term economic growth. In any case, given the current status quo, taxpayers should clearly be more proactive in their internal audits and the analysis and management of their tax risks.
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 – providing a compass with which to find the right path forward when preparing and handling a tax audit or controversy, either to assist in managing a good settlement or, if this proves unworkable, in conducting a successful dispute.