Managing Global Tax Controversies

Multinational corporations are not the most sympathetic group and do not normally engender feelings of concern, pity, or warmth. While there is no reason to feel sorry for a large multinational, the chief tax officers and tax professionals who work at these entities do face an ever-increasing workload as the rules of global taxation change, enforcement activities rise around the world, and revenue authorities seek to maximize collections. As the work of the OECD moves forward and revenue authority scrutiny of multinationals escalates, navigating the global tax and tax disputes landscape becomes even more challenging. The simple act of keeping track of the many revenue authority inquiries may be overwhelming.

The rise in disputes and the increase in worldwide scrutiny of multinationals over the past several years has led to the development of a new and necessary role at these large entities. The individual in this role is keenly focused on the entity’s overall global disputes profile and is charged with oversight of the global tax disputes landscape. In-house tax professionals with a title like “Global Head of Tax Controversy” have become increasingly commonplace; 10 years ago, even the generic “Tax Controversy” designation was uncommon. Though the titles vary (and many companies have someone in the role but without the title), the position has evolved as the need to focus on an entity’s overall global disputes profile has become more evident. Unsurprisingly, the creation of this new role and the focus on the need for oversight of the global disputes environment began several years ago with a spike in global disputes — and it has continued at a steady pace. Now the individuals in these positions play key roles in the management of multinationals’ tax risk and controversy profiles.

There is no “one size fits all” approach to managing global tax disputes. The oversight role for a global tax disputes function is determined, to a great extent, by the culture, needs, and structure of the entity. In my many years of discussing this issue with multinationals and advising them on how best to structure their global disputes team, it has always been very clear that there is no one right way to define and create this role and function. The one thing that companies agree on is that there is a clear need for such a team. How global disputes oversight operates and fits within the overall structure of the tax function across companies will vary.

The starting point for determining what works for a particular company is to ask how the company currently manages its global tax disputes portfolio. The next step looks to what the company wants to achieve. The needs and ultimate goal of each company may be different, but the role or function itself — creating and maintaining a line of sight into the company’s overall global tax disputes landscape — is constant. Global heads of tax controversy (and the overall function) deal with many of the same issues, which generally include:

• how to create or manage the global team;

• what type of reporting should be implemented;

• whether and what type of technology should be used;

• whether transfer pricing should be part of the controversy reporting line; and

• how involved the global head of tax controversy should be in specific country’s dispute resolution proceedings.

Endless Questions

There are always many questions about controversy resources, including the very basic “How many people do we need?” This question is often followed by consideration of whether a global tax disputes team needs resources in every jurisdiction in which it is dealing directly with a revenue authority. And there are always questions regarding when and whether outside advisers are needed. The questions are endless, and the answers are, too, because there is no one correct answer. Here, I take a closer look at some of these questions.

Do we really need a global head of tax controversy (or someone charged with the oversight role on a global basis)? Do we need a global disputes tax function?

This is, of course, the initial, baseline question. If you are a multinational operating in three to five jurisdictions and are engaging in activity with the revenue authorities, then the answer may be yes. At a minimum, you likely need someone to oversee the global tax disputes activity in your entity. Perhaps you do not need a larger functional group, but there should be someone responsible for oversight of this critical risk area. If you operate in only a few countries, it is often possible for the role to be an add-on responsibility for someone already accustomed to dealing with the revenue authorities. One must be mindful, of course, that not all revenue authorities are the same, and the analysis of what a company needs cannot be based solely on the number of jurisdictions in which it is engaging with revenue authorities. The focus may more properly be on the specific countries you are dealing with and the number of disputes that are arising, as opposed to the number of jurisdictions. In some countries (such as Brazil), it is quite common for a multinational to have multiple matters pending at the same time. If you are operating in a country like Brazil and only three other jurisdictions, that may merit a dedicated global controversy resource. Simultaneously dealing with revenue authority inquiries in a number of jurisdictions can be difficult; this, combined with the rise in information sharing and the ever-increasing amount of available information, highlights the need for consistency in process and response. For a multinational, consistency is key, and having someone charged with ensuring that consistency is critical.

Do we need a dedicated process for tracking disputes?

Yes. Multinationals need a process that is practical, useful, and easily understood by all parties, no matter where they are located. The process should provide clear guidance regarding how revenue authority inquiries are to be dealt with and lay out an internal reporting structure for revenue authority inquiries. Determining the reporting lines and ensuring that they align with the company’s overall reporting lines is key. Thought must be given to the existing tax reporting procedures to ensure that the disputes function aligns with that structure.

How detailed does the process need to be?

That depends on your company. There should be sufficient detail to ensure that there is a clear, workable process in place, but not so much detail that the process is impossible or impractical to follow. There is no point in developing a process that no one can adhere to. Nonetheless, there are some basic items that should be captured and tracked as part of the overall process, such as inquiry start date, conference dates, issues raised, exposure amounts, document requests and response dates, progress on resolution, and statutes of limitation.

Consideration should also be given to whether you would like your internal guidelines to address the company’s overall approach to dealing with revenue authorities. What is your policy on how to engage with the revenue authorities? When and how does the global head need to be directly involved with the disputes? Is there a dollar threshold that must be met before the matter requires the involvement of the global head, or is the involvement triggered by a particular type of issue? Very serious consideration should also be given to the issue of privilege, which can become complicated in a cross-border context when multiple jurisdictions are involved. Some jurisdictions have no privilege concept. Others have limited privilege protections. Knowing the rules in each jurisdiction is vital.

Do we need a technology tool?

Most likely, yes. The type of tool you select will depend on your needs, the volume of inquiries with which you are dealing, and what other technology the tax team may already be using. A good technology tool can streamline your process and provide a repository for easy access to documents and information. Your ability to proactively manage an inquiry is often directly related to the timely availability of your information.

Should the transfer pricing team report to the controversy team?

It depends! I have always believed that, at a minimum, there should be one designated transfer pricing professional reporting to the tax controversy team to ensure strong connectivity and that the global head of controversy is always aware of transfer pricing developments. Because transfer pricing is the number one issue in almost every jurisdiction, omitting transfer pricing from the global controversy reporting team or process would not make sense. Nonetheless, because transfer pricing has at least two components — a regulatory, documentation reporting requirement as well as the tax controversy side — companies may be reluctant to place the transfer pricing function within the controversy team. Whether every transfer pricing staff member should sit with the global controversy team is a company-specific decision, but ensuring connectivity between those groups is critical for a global controversy function.

Does the controversy team need a dedicated IT person?

This question has come up more frequently over the past few years as revenue authorities have continued to develop and expand their technological capabilities. Tax technology is an emerging area of practice, with many large accounting firms and tax teams seeking individuals with this expertise. Universities have recognized this is a valuable area of study and some now offer targeted degrees and certificates. Someone who talks both tax and technology can be an invaluable aid to a global controversy team because so many information requests are now required to be provided electronically.

The Essentials

There is so much to think about when imagining or reimagining a multinational’s global tax disputes function. This article provides a starting point but has barely scratched the surface of what should be considered. What is clear is that the global tax disputes environment will continue to challenge in-house tax professionals. Knowing exactly what you are dealing with, what your exposures are, and where you are at risk is key. Similarly, a process that allows you to act consistently across the globe, access your information, and manage the inquiries is important. The global tax disputes landscape is going to get more complicated in the coming months and years. Having a person and a process in place can help multinationals prepare for and deal with both the current situation and what is ahead in this constantly evolving and challenging area.