Global tax risk and controversy are on the rise globally, especially for multinational enterprises (MNEs), and this is driven by a number of factors. The first part of this article is devoted to examining the general trends in the global tax landscape within which the MNEs operate in order to set the background. Later in the article, the various phases in the tax risk management process, and the tools available to manage risk under each phase are highlighted. The article then concludes by highlighting the risks created by tax controversy.
First and foremost, businesses have become very dynamic, with transactions being structured in ways that were never envisaged at the time the tax laws were being enacted. We are now talking about e-business, digital economy, block-chain, robotics, to mention a few. All these developments present new challenges for Revenue Authorities, MNEs and their tax advisors alike. Secondly, the global tax landscape is more volatile and contentious, hence causing more tax disputes and controversy. We have seen a plethora of tax reforms both in the United States and in the European Union coupled with the famous Brexit in the United Kingdom. All these developments have far-reaching ramifications for MNEs wherever they operate, including in the developing world. Thirdly, Revenue Authorities around the world have become more aggressive and focussed on transactions taking place in their jurisdictions, especially by MNEs. The G20 countries as well as the member countries of the Organisation for Economic Cooperation and Development (OECD) and the Africa Tax Administration Forum (ATAF) have been at the forefront of driving this agenda. As the Ethiopians say, “The man that marries a beautiful wife, and the one that grows corn by the roadside, have the same problem”! The MNEs are the proverbial man that married a beautiful wife; every Revenue Authority wants to grab a share of what they perceive as income generated from its territory. Fourthly, the rapid pace of tax law changes creates more tax risk and controversy since taxpayers find themselves always aiming at a moving target in their tax compliance agenda. In the wake of the finalisation of the OECD’s Base Erosion and Profit Shifting (BEPS) Project, many countries have embarked on a flurry of tax law changes, ranging from the traditional amendments to complete overhaul of tax laws. For example, Kenya, Uganda and Tanzania have in the past two or three financial years effected a number of amendments in their domestic tax laws; Rwanda, on the other hand, has taken a more radical approach in the past three years, issuing completely new Income Tax and Value Added Tax Laws as well as cancelling its Double Tax Treaty with Mauritius and negotiating an entirely new Treaty. We are also witnessing increased information sharing among Revenue Authorities, presenting new challenges for multinational companies (MNEs). In the developed world, it is not uncommon for a multinational group to be handling a tax issue with the Tax Administration in one territory, only for follow-up queries on the same subject to be raised by the Tax Authority of another jurisdiction in which they operate. On the African continent, the Africa Tax Administration Forum (ATAF) is spearheading this. At the tail- end of July 2018, during my tour of duty in Rwanda, I was privileged to attend the ATAF High Level Tax Policy Dialogue that took place in Kigali. The subject of information sharing was high on the agenda; therefore, MNEs cannot afford to adopt a business-as-usual approach to their tax compliance agenda in Africa anymore. Additionally, narrow tax bases in most of the developing countries mean that Revenue Authorities have become more unreasonable and aggressive in their approach and interpretation, especially when it comes to grey areas in the law as well as borderline cases, in order to meet increased tax revenue targets. For instance, Uganda Revenue Authority was tasked to collect about Sixteen Trillion Uganda Shillings last financial year; this has been raised to about Twenty Trillion for the current financial year. Hence, taxpayers should not expect to be faced with an overly reasonable taxman. As the Nigerian saying goes, “The frown on a goat’s face does not prevent it being taken to the market for sale”! In a nutshell, all the above trends imply that taxpayers and their business advisors must take a more holistic view of the tax legislative and regulatory environments within which they operate if they are to remain on top of their tax risk management agenda.
Source: New Vision