In an ever-changing world, tax authorities are evolving how they operate to become more efficient at assessing tax risk, confronting non-compliance and collecting taxes. It is important for businesses to understand how tax authorities are evolving so they can adopt strategies to effectively manage future tax controversy risks..
Technology
Given the scarcity of available resources, tax authorities seek efficiency through technology solutions and the adoption of risk assessment procedures to help focus on issues likely to give rise to greater levels of tax risk.
Over many years, tax authorities have been moving away from largely paper-based interactions with manual/siloed processes and are now adopting digital data analytical tools, which are more connected with other parts of government and the private sector.
In an Irish context, an example of this was the introduction of Pay as you Earn (PAYE) modernisation in 2019 and Enhanced Employer Reporting in 2024, both of which introduced significant changes to how and when a business sends and communicates PAYE/non-PAYE expense and payment information to the Revenue Commissioners. This data is mined and leveraged by Revenue for risk assessment and audit activity.
Further developments are taking place to build-in compliance in an increasing number of areas, to move taxation closer to taxable events and significantly reduce the burdens that can arise from using different processes for taxation to those used in taxpayers’ daily lives and businesses.
This vision is described by the Organisation for Economic Co-operation and Development (OECD) Forum on Tax Administration in a 2020 discussion paper as “Tax Administration 3.0”. Developments in generative AI and Large Language Models will accelerate the automation of many interactions with tax authorities, making them more seamless and frictionless over time and bringing potentially significant reductions in the administrative burden for taxpayers. Given that tax authorities increasingly resemble government data centres, additional safeguards will also need to be developed by governments to protect taxpayer data from misuse and abuse.
Transparency and international cooperation
Exchange of information mechanisms between jurisdictions have fundamentally reduced the information asymmetry that previously existed between tax authorities and taxpayers. Tax authorities now have unprecedented access to their cross-border data, making it harder for businesses to avoid scrutiny, leading to controversy and uncertainty.
Further, increased international cooperation means that tax authorities are no longer constrained by borders. For example, the OECD and European Union have attempted to enhance cooperation between tax administrations through joint audits. At a European Union level, 2023’s ‘DAC7’ Directive provides an additional legal basis for joint audits between EU member states and Ireland has already transposed domestic legislation to align Irish tax law with this initiative.
Public country-by-country initiatives implemented by the European Union and Australia also add an extra layer of transparency which larger corporates will need to deal with. Increased public scrutiny will likely increase the pressure on tax authorities to tackle perceived evasion and profit shifting strategies adopted by taxpayers.
Policy shifts and the rise of protectionism
Increased international tensions and the potential for trade wars arising from the increased use of tariffs has understandably dominated headlines. However, behind-the-scenes, transfer pricing disputes have, for many years, resembled a ‘tug of war’ between countries fighting over profits and ultimately tax revenues from a multinational enterprise. Many jurisdictions have increasingly adopted aggressive interpretations of tax law in transfer pricing leading to disputes and tax uncertainty.
In the past there has been a tendency for tax authorities to increase audit activity in reaction to economic shifts (eg economic downturns, post-Covid). The rise of protectionism between countries will likely further accelerate this trend. In turn, many businesses are considering the impact of this on their supply chains and assessing mitigation strategies.
The next major international battleground is likely to be the impact of digitalisation/data/AI on operating models and how they influence value creation for multinational groups. Maintaining a well-resourced and experienced Irish competent authority representation to effectively negotiate transfer pricing issues on a principled basis is likely to remain an important feature in defending Ireland’s corporate tax base.
Evolving case law
The constantly evolving nature of legal case law, both domestically and internationally, and its influence on tax authorities’ behaviour leads to further uncertainty for taxpayers. In an Irish context, an example of this can been seen from developments in relation to the ability of Revenue to reopen historic returns.
Recent High Court decisions in Tobin and O’Sullivan arguably indicate that the threshold on when a Revenue officer may be legally entitled to revisit tax assessments and impose further liabilities beyond the four-year statute of limitations is extremely low.
Internationally, it is not uncommon for contradictory outcomes in tax cases across different jurisdictions involving similar issues. This can also lead to entrenchment, international tax disputes and uncertainty for taxpayers.
Amid this cloud of change and uncertainty, what can taxpayers do now to prepare?
Tax in the boardroom
With the anticipated increase in tax controversy, emerging tax transparency initiatives and the associated increases in reputational risk from both, organisations should ensure that oversight of tax is considered at board level. This could involve ensuring the responsibility and oversight of tax compliance is built into existing corporate governance frameworks with everyone from the board down clear on where responsibility for tax sits.
Tax should also be included in discussions from the outset of any changes to the business which could have an impact on tax returns. This could involve tax and/or finance teams working closely with the business as commercial strategies are set and evaluated. Such a top-down approach would go towards ensuring tax risks are evaluated in advance or during a transaction, rather than several years later when a tax authority raises queries under audit.
Tax transaction file
Given limited resources, most tax authorities’ approach to tax compliance is risk-based. Scrutiny from tax authorities should be anticipated for all material transactions (eg share or asset transactions), whether disclosed in tax returns, by way of transparency initiatives or through media reporting.
In our experience, whether it be during tax audits or before the tax courts, significant weight is placed on documentary evidence to support any number in a tax return. As organisations form strategies to manage policy shifts and trade tensions and strive to monitor tax risk amid changing case law, consideration should be given to the preparation of a ‘transaction file’ to support any restructuring.
Organisations should ensure that oversight of tax is considered at board level
This can be an efficient and effective way of assessing the transaction for tax risk in real time, ensuring the applicable tax law is analysed, documenting the commercial reasons for the various elements of the transaction and ensuring all related documents (eg legal agreements, valuations, supporting calculations) are stored together should it become subject to future scrutiny by a tax authority.
Tax authority interactions
Taxpayers may also consider their relationship with tax authorities in the context of tax certainty. For example, eligible corporate groups may consider tax authority/taxpayer compliance assurance programmes such as Revenue’s voluntary Co-Operative Compliance Framework (CCF). Revenue describes CCF as a relationship “based on trust, mutual, understanding, accessibility, openness and transparency”.
Since its inception in 2005 and relaunch in 2017, the number of groups in CCF grew to 130 by the end of 2024. While CCF requires a time investment on the part of taxpayers and comes with certain obligations including increased transparency, a notable benefit is that taxpayers will only be audited in exceptional circumstances.
Under the programme, participants also have increased ability to voluntarily make disclosures to Revenue which brings the benefits of penalty mitigation and a reduced risk of publication on the tax defaulters list. This can further tax certainty for an organisation.
Data assessment
With increased exchange of taxpayer data referred to above, taxpayers may consider assessing the information about their business tax authorities have access to, whether it accurately reflects the tax profile of the organisation and whether it could lead to increased risk of tax disputes.
Taxpayers should also consider their rights and obligations when it comes to data requests from tax authorities. Does the tax authority have the right to request such data? Tax authority data requests are governed by domestic and international tax law and organisations should familiarise themselves with this legal framework or seek advice to understand their rights.
Organisations should also consider whether, in the hands of tax authorities, this data could lead to potential tax disputes and consider proactively assessing and managing this risk.
In the context of changing technology, tax authority behaviour, increased transparency and evolving case law, tax controversy and uncertainty is inevitable for most organisations. However, lengthy tax audits, disputes and appeals need not be. By taking proactive measures such as ensuring oversight of tax at board level, considering tax risk earlier in business decisions, properly documenting business changes and how they impact tax and reviewing relationships with tax authorities, businesses can mitigate tax risk and ensure that, should it arise, the associated audits and appeals do not significantly impact the business financially and reputationally.
Fionnuala Hynes is a director, of Tax Controversy, at Deloitte Ireland, and Richard Lombard is a director of Transfer Pricing, at Deloitte Ireland