Rising tax controversy in Africa panel discussion at EY’s 11th annual Africa Tax Conference

A convergence of trends has created the ripest environment for tax controversy in years. Nonetheless, there are strategies that will allow companies to mitigate this.

The increasing demand being placed on governments throughout Africa to meet infrastructural and transformation requirements has led directly to a need for increased tax revenues. This, in turn, has caused a significant rise in tax controversy, as businesses seeking stability in respect of their tax obligations and exposures are realising that the solutions of the past are no longer enough to manage their future tax obligations.

Companies around the world have thus had to endure increasingly rapid changes to both tax policy and enforcement. In fact, the EY 2014 tax risk and controversy survey concludes that 81% of all companies surveyed agreed or strongly agreed that tax risk and controversy will become more important for their companies in the next two years.

Businesses today are concerned about four key areas of tax risk, namely: reputation risk; base erosion and profit shifting (BEPS) and legislative risk; enforcement risk; and operational risk.

The survey indicates that 89% of the largest companies are somewhat or significantly concerned about the media coverage of the taxes they are paying or their seemingly low effective tax rates. In response, at least 65% said that they have developed a more structured approach to managing their public tax profile. The criticism of the ‘share’ of tax paid by companies, including complaints that such percentages are often unfair, have largely driven the second major area of risk facing companies today, which is the rapid increase in new and potential legislation and regulation.

Following directly on from this is the third area of tax risk facing businesses today, which is more aggressive, focused tax enforcement. Almost every company surveyed also felt that global disclosure and transparency requirements would continue to grow in the next two years. This was coupled to a sense that mutually constructive relationships between taxpayers and authorities are becoming strained.

In terms of enforcement risk, most companies claim their leading source of risk remains transfer pricing, identifying risk management as their top transfer pricing priority. Just behind this come indirect taxes and permanent establishment risks.

Finally, the main sources of operational tax risk identified by large companies include insufficient resources to cover tax function activities, insufficient internal communication and a lack of processes or technology.

It is clear, that while the forces driving heightened risk can be managed, the divide between current and future tax risk management models will not be easy to bridge. Enterprises will, he says, need to flawlessly execute a well thought-out, well-resourced strategy and at the same time remain flexible enough to deal with today’s changing weather conditions.

To successfully manage risk and mitigate tax controversy, companies need to seek to engage in the legislative and regulatory agendas of government and its agencies, as well as work with administrations on entering into arrangements that bring greater stability and certainty around otherwise uncertain tax positions. Most importantly, businesses must be prepared to react, discuss, dispute or settle matters where there is disagreement with the authorities.

Truly successful enterprises will be able to better anticipate changes in rules that give rise to controversy, create better processes and improve on the handling of local tax disputes, and prevent conflict through the effective use of rulings, fiscal stability agreements, APAs, disclosure regimes and fast-track settlements.