As tax authorities become more proactive, Gordon Gao, BDO Tax Partner and China Lead, explains how organisations can stay ahead of enquiries.
Tax authorities worldwide have undergone a significant transformation in recent years. A decade or two ago, many were characterised by slow, reactive approaches that focused primarily on retrospective tax collection. Today, regulatory bodies are notably swifter, more proactive, and increasingly strategic in their enforcement.
Driven by the need to uncover abuse and recover lost revenues at a time of economic stress across the globe – from the US and Europe through to China and other emerging markets – the job of a tax regulator is now more akin to that of a criminal investigator than the old stereotype of the tax collector recouping lost tax through retrospective fines and deals.
That proactivity is already having an impact. The latest BDO Global Tax Outlook research revealed that 81% of firms have seen a rise in queries over the last two years.
What that means for those running tax compliance functions is becoming clearer: they need to create and iterate systems and processes that demonstrate real-time engagement with enquiries; they need to work with other parts of the business to produce and provide the relevant documentation at much shorter notice; and they need to show regulators that they take ongoing engagement seriously.
We have seen from our work with clients that focusing on developing robust data management systems up front can save a great deal of time and effort further down the line. Indeed, if businesses accept that they will inevitably face some kind of tax enquiry on a regular basis, it clarifies what is needed.
Compliance leaders have to take the initiative on the preparation, management, and deployment of tax data. That is imperative for two reasons: not only will it make life easier internally, but being ready for any enquiry with the required documentation will also demonstrate to tax authorities their level of engagement with regulations, and how closely they track and monitor tax compliance.
So clearly, information and data count. However, it’s also worth remembering that not all information is equal. Not knowing what documentation is required and failing to have it ready in the correct form is unlikely to help the progress of a tax enquiry. Instead, effective preparation for a tax enquiry will hone in on what information is most pertinent, when it will be needed, what format it should be in, and whether it will need revisions before submission.
A tax compliance team that fails to deliver on these demands will not only slow the process down (and tie up precious resources in the process) but might also create a very negative impression: that the company is deliberately ‘snowing’ authorities with a blizzard of unnecessary data to stymie the investigation.
It may seem trivial, but these things matter. Tax authorities worldwide are well-versed in dealing with organisations keen to avoid or obstruct investigations. As a result, they are very familiar with the typical tactics employed: delays, obfuscation, and so on. A disorganised or chaotic response to an enquiry may well arouse suspicion and prompt a more aggressive approach from regulators.
Make no mistake: tone and behaviour matter in this scenario. That is also true when it comes to escalation policies, in case enquiries do progress and develop into something more significant. As any business continuity planner will know, the best-laid plans can quickly fall apart without effective routes that allow leaders to respond swiftly with greater oversight and – if required – appeals.
Getting this right is critical, since regulators will assume client companies have invested sufficient time and money in an enquiry infrastructure that is fit for purpose. Companies that have done that will usually find they are working with a receptive and positive regulator when an enquiry begins.
Working closely with the right compliance partner can also make a valuable difference. The right adviser can add value as an ‘aggregator of experience’, absorbing lessons and insight from their work across clients and sectors, helping to anticipate what kind of analysis the authorities might undertake, and working closely with the client to ensure the right data and analytics are in place to inform and strengthen the response.
What matters most is being able to respond to enquiries with accuracy and speed. Businesses that can demonstrate strong control of their data and processes are more likely to be treated as cooperative counterparts rather than as obstacles. That shift in perception can influence both the pace of an enquiry and the tone of engagement with regulators for the better.
Tax authorities worldwide have undergone a significant transformation in recent years. A decade or two ago, many were characterised by slow, reactive approaches that focused primarily on retrospective tax collection. Today, regulatory bodies are notably swifter, more proactive, and increasingly strategic in their enforcement.
Driven by the need to uncover abuse and recover lost revenues at a time of economic stress across the globe – from the US and Europe through to China and other emerging markets – the job of a tax regulator is now more akin to that of a criminal investigator than the old stereotype of the tax collector recouping lost tax through retrospective fines and deals.
That proactivity is already having an impact. The latest BDO Global Tax Outlook research revealed that 81% of firms have seen a rise in queries over the last two years.
What that means for those running tax compliance functions is becoming clearer: they need to create and iterate systems and processes that demonstrate real-time engagement with enquiries; they need to work with other parts of the business to produce and provide the relevant documentation at much shorter notice; and they need to show regulators that they take ongoing engagement seriously.
We have seen from our work with clients that focusing on developing robust data management systems up front can save a great deal of time and effort further down the line. Indeed, if businesses accept that they will inevitably face some kind of tax enquiry on a regular basis, it clarifies what is needed.
Compliance leaders have to take the initiative on the preparation, management, and deployment of tax data. That is imperative for two reasons: not only will it make life easier internally, but being ready for any enquiry with the required documentation will also demonstrate to tax authorities their level of engagement with regulations, and how closely they track and monitor tax compliance.
So clearly, information and data count. However, it’s also worth remembering that not all information is equal. Not knowing what documentation is required and failing to have it ready in the correct form is unlikely to help the progress of a tax enquiry. Instead, effective preparation for a tax enquiry will hone in on what information is most pertinent, when it will be needed, what format it should be in, and whether it will need revisions before submission.
A tax compliance team that fails to deliver on these demands will not only slow the process down (and tie up precious resources in the process) but might also create a very negative impression: that the company is deliberately ‘snowing’ authorities with a blizzard of unnecessary data to stymie the investigation.
It may seem trivial, but these things matter. Tax authorities worldwide are well-versed in dealing with organisations keen to avoid or obstruct investigations. As a result, they are very familiar with the typical tactics employed: delays, obfuscation, and so on. A disorganised or chaotic response to an enquiry may well arouse suspicion and prompt a more aggressive approach from regulators.
Make no mistake: tone and behaviour matter in this scenario. That is also true when it comes to escalation policies, in case enquiries do progress and develop into something more significant. As any business continuity planner will know, the best-laid plans can quickly fall apart without effective routes that allow leaders to respond swiftly with greater oversight and – if required – appeals.
Getting this right is critical, since regulators will assume client companies have invested sufficient time and money in an enquiry infrastructure that is fit for purpose. Companies that have done that will usually find they are working with a receptive and positive regulator when an enquiry begins.
Working closely with the right compliance partner can also make a valuable difference. The right adviser can add value as an ‘aggregator of experience’, absorbing lessons and insight from their work across clients and sectors, helping to anticipate what kind of analysis the authorities might undertake, and working closely with the client to ensure the right data and analytics are in place to inform and strengthen the response.
What matters most is being able to respond to enquiries with accuracy and speed. Businesses that can demonstrate strong control of their data and processes are more likely to be treated as cooperative counterparts rather than as obstacles. That shift in perception can influence both the pace of an enquiry and the tone of engagement with regulators for the better.