Managing tax disputes, playing smart
Tax litigation and disputes can disrupt businesses, damage reputations, and generate significant costs. Taxes have become increasingly connected, global and digital. More sophisticated and complex. Businesses find themselves now more exposed to revenue risks than ever before. Tax disputes have evolved from a simple two-sided disagreement into a multidimensional, multi-agency and maybe even a multi-country dynamic.
In recent years, there has been a rise in tax disputes due to the uncertainty and complexities in tax laws, plethora of amendments, poor drafting amenable to multiple interpretations, enhanced compliance burden, ‘creative’ structures or transactions by taxpayers to avoid their tax burden, perceived adversarial approach of the tax officer, lack of clarity on new provisions and conflicting rulings pronounced by different appellate forums coupled with aggressive interpretations by both taxpayers and tax authorities, prolonged tax dispute resolution mechanisms - all contributing to multiplicity of tax disputes. If taxpayers have a clear understanding of their obligations, a greater number of them would be inclined to comply appropriately, thereby reducing the potential for litigation. Tax authorities need to remove the provisions which have outlived their utility or are litigation-prone, conduct regular stakeholder consultations to identify issues of tax disagreements, periodically review the laws to check their relevance in the changed economic and business scenario, and avoid undue complexities in tax laws and their frequent amendments. Tax laws need to be in precise and simple language, and be technically well drafted. Clear and lucid interpretative clarifications on contentious issues should regularly be issued by tax authorities.
Tax litigation can be a significant burden on businesses, leading to heavy expenses in legal fees, diversion of management time, and disruption to operations. The stakes are high, and the situation challenging. The precision of today’s targeted enforcement and the sheer volume of issues and authorities involved amplify the pressure on tax functions to have the right resources and strategies to keep up with compliance requirements. The speed with which tax policy changes and digital tax methods are adopted only adds to the equation. Time for traditional reactive strategies is long gone. It may be smarter to conduct one’s business so as to ensure that the cause for a dispute does not arise in the first place. Businesses need to adopt a multi-pronged approach - gather strong knowledge of the latest tax laws, rules, exemptions and credits available to them, leverage technology and automation, maintain good record-keeping practices, anticipate potential problem areas to work out a solution, follow a proactive and collaborative approach to tax compliance and seek expert advice for handling complex issues.
It is interesting to note that technology is one area where, broadly speaking, tax administration is ahead of taxpayers. Tax authorities have long been using artificial intelligence/data analytics to detect cases of tax evasion and non-compliances from data collected from various sources, creating risk profiles of taxpayers, analysing trends, flagging potential audit issues and identifying higher-risk cases for deeper investigation. Going forward, it is anticipated that use of technology will only increase, thereby improving the efficiencies of the tax authorities to identify red-flags. These efforts of tax administration have changed the tax compliance culture in India. It would be fair to say that today, technology, automation and analytics are the backbones of tax administration and these are changing the tax compliance landscape.
Considering the above, it would be advisable for the taxpayers to be proactive in terms of reconciling data under various filings/sources, voluntarily declaring income from the income-generating transactions, information of which is already available with tax authorities, and identifying focus areas of the tax authorities upfront and taking precautionary measures in advance.
Businesses are learning to adapt to an increasingly digitalised environment. Automated tax solutions with appropriate customisation can handle the expanding global compliance requirements, and improve the inefficient and manual processes, high level of error rates, inaccuracies and/or lack of compliance. There is a paradigm shift in the tax function of an organisation, it is slowly transforming from being just a compliance division to something more, to a value-adding supportive role which has a say in the formulation of corporate strategies. Digital tax governance in an organisation helps in workflow management, ease in assigning responsibilities, alerts and notifications for tracking compliance, maker-checker concept to ensure data integrity, and tracking status on a real-time basis, but customisation is needed to meet specific compliance requirements. Technology is helping the tax function achieve accuracy, speed, efficiency and transparency in tax processes, compliances, and reporting, and also acts as a game-changer in the transformation of the tax function.
Maintaining accurate and comprehensive record-keeping practices, as well as maintaining proper and robust documentation and capturing the commercial substance of the transaction in legal documents to support tax filings is key. By doing so, businesses can provide the tax authorities with the information they need to assess tax liabilities and make informed decisions about audits and disputes. Appropriate disclosures in tax returns is important, bringing relevant facts and legal documents on record of the tax authorities in the beginning itself to lay foundation for a strong case. This can also help in defending against the levy of any penalty, if the claim/stand of the taxpayer is not accepted in the tax assessment.
Businesses must act so that their people, policies and systems are keeping pace. They need a line of sight into the issues and the potential for future tax disputes as well as a centralized global strategy. Should disagreements arise, having resources that can act as a “bridge” between the tax authorities and the company is essential. They must shift the focus to risk mitigation, and adopt a proactive and collaborative approach to tax compliance. This involves developing a strong understanding of the tax laws and regulations that apply to the business, conducting regular internal audits to identify potential tax compliance issues, educating employees on tax compliance matters and the importance of accurate record-keeping and maintaining transparency in their interactions with the tax authorities. Businesses should try to understand the working of the tax authorities and find mutually acceptable solutions to potential contentious issues before they become major problems. Vetting of transactions should be carried out from an income tax perspective to ensure compliance with all applicable laws and its legal do-ability. Legal documents should be appropriately drafted and vetted from tax perspective to capture the intended structures, so as to avoid unnecessary litigation or disputes going forward. It is important that the commercial intent behind each transaction is immaculately captured in the transaction documents. This can help to build trust and goodwill with the tax authorities, which can reduce the risk of disputes.
To seek expert advice from tax professionals for complex matters is smart play. Tax professionals can help businesses navigate the complex and ever-changing tax laws and regulations landscape that apply to them. For instance, when undertaking international transactions with related parties, it may useful to get them to carry out a transfer pricing study prior to the transaction, as opposed to the same being an afterthought. It is critical that the taxpayer has proper and effective legal representation before the tax and appellate authorities, who carefully draft legal submissions for the judicial authorities, and bring all the relevant facts to the fore at the first possible instance. There should be timely compliance with official procedures and follow-up, to push for speedy disposal of disputes. By leveraging the expertise of tax professionals, their strategies and insights, businesses can reduce their tax risks, better manage tax controversy and resolve tax disputes-and have time to focus on how to do their business.
