Navigating the corporation tax risk and controversy landscape

Corporation tax audits and appeals in a virtual world 

Against the backdrop of the pandemic, Revenue has quickly adapted to carrying out audits, including those relating to Corporation Tax, in a virtual world. We have seen two main changes to audits. Firstly, opening audit meetings are now being held virtually. Secondly, Revenue is requesting more electronic records from companies so that its data testing can be performed remotely. These changes have not altered the underlying nature of a Corporation Tax audit. It remains a data intensive, analytical and time consuming process.

The Tax Appeals Commission too has held virtual hearings and virtual case management conferences. Its commitment to a streamlined appeal process and ambitious targets to clear the backlog of appeals cases has not been impacted by the pandemic, as they have quickly adapted to virtual operations. The pace of the appeals process, including the pace at which determinations are issuing after hearings, has actually increased in the past year.

Time limits 

We have recently seen a number of cases about the application of statutory time limits. It is important that you are aware of your rights and obligations. 

It is also important to be aware that the statutory time limits only apply where you are fully compliant and there has been a full and true disclosure of all material facts necessary to make an assessment in your tax filings. Care must be given to the completion of the corporation tax return to make sure that this condition is satisfied. 

While the four year time limit for Revenue to make an assessment on an accounting period is often front of mind, what is not so obvious are the rights and obligations of the taxpayer in relation to queries received from Revenue.

There has been an increase in queries being received from Revenue towards the later part of the four year time limit for making an assessment. It is important to know your rights and obligations. This time limit also applies to the making of enquiries or taking actions by Revenue and consideration should be given to the approach taken in this scenario, while aiming to maintain a cooperative relationship with Revenue.

Risk factors shaping Corporation tax audit and appeals activity

Data

Data plays a key role in Revenue’s process for risk assessing the corporation tax profile of companies and in selecting cases for audit.

The information Revenue has available has also been increasing in recent years, with the corporation tax computations, returns and the iXBRL financial statements being delivered electronically in a format that can easily be interrogated by Revenue. Revenue’s data analysis systems can dissect all of this information, making it very easy to identify anomalies and inconsistencies that could indicate that there has been an underpayment of tax. 

Risk factors

There are a number of risk factors that continue to shape Revenue interventions and appeals activity for corporates.

Due to the quantum, materiality and complexity involved, simply availing of certain corporation tax reliefs can heighten the risk of a company being selected for an audit. 

For example, businesses that claim any significant reliefs (like the R&D tax credit, S.291A capital allowances, S.83 management expenses and S.247 interest relief, etc.) have a higher chance of being the subject of a corporation tax intervention. Care should be taken when claiming a relief.

Additionally, royalty payments continue to be an area of focus for Irish Revenue, with both the deductibility and the withholding tax position being examined. There continues to be a number of appeals in the system in respect of this area, as well as an increase in challenges on the deductibility of other withholding taxes. 

The pace of changes that we are seeing in the corporation tax legislation in recent times, at both EU and domestic level, adds further complexity to an already challenging corporation tax landscape and will no doubt shape future audit activity.

Key principles emerging from the Tax Appeals Commission (TAC)

A number of important determinations have recently been published from the Tax Appeals Commission that have set out some key principles which are informative as to the TAC’s jurisdiction and how it is approaching cases. Some of the important points we are seeing emerge include:

• The supremacy of EU law
• The presumption against retrospective effect of new tax legislation
• A move away from the “purposive approach” to interpreting tax legislation in a more literal reading of the words used by the Oireachtas, as set out in the case of Bookfinders Ltd v Revenue Commissioners [2020] IESC 60
• All valid grounds of appeal must be included in a notice of appeal

Five key actions to take now

A clear understanding of the tax risks involved in day-to-day and one-off Corporation Tax matters is key to ensuring the best outcome when Revenue intervenes. 

What steps can you take to achieve this?

Understand your risk profile

When assessing a company’s Corporation Tax profile, Revenue will examine the key risk areas that impact the company’s tax position.  This typically includes claims for reliefs, significant payments to related parties, exceptional costs and restructurings. 

It is important that you are aware of your risk profile so that you can proactively take steps to prepare for this Revenue scrutiny.

Tax Control Framework

The establishment of a Tax Control Framework (TCF) is key to the management of the above risks. The TCF comprises various structures, arrangements and process controls in place to ensure that your corporation tax filings are accurate. 

Key areas that you should consider in the development of a TCF would include; tax governance; adequacy of, and expertise within, the tax function; and operational controls and procedures in place to address specific corporation tax risks. 

Once controls have been established, they should be regularly tested to ensure that they remain effective.

Documentation is key 

Having contemporaneous documentation in place that can demonstrate the merits of a tax transaction or a tax position adopted can give Revenue a level of comfort that may prevent a dispute from arising. 

It also serves as your first line of defence in proactively managing the company’s broader corporation tax risk. 

Where a dispute is under appeal, it is important to note that the burden of proof is on the taxpayer to prove the relevant facts of the case. The Tax Appeals Commission is a fact finding court and findings of fact cannot, except in very limited circumstances, be appealed to higher courts.

Understand your rights and obligations

If a Corporation Tax aspect query or assessment has been received, the taxpayer should consider all the options that are available before interacting with the tax authority. It is important to be cooperative and meet your tax obligations  but if there is doubt as to whether the intervention is within the statutory time limit, pause and consider your options. Having taken time to assess, you may wish to discuss your concerns with Revenue, to maintain a cooperative relationship. However, be alert to when Revenue may be seeking more information than they are entitled to and the impact that may have on your rights.

Be diligent

In order to ensure the various protections contained in tax legislation for taxpayers will be available (e.g. Expression of Doubt, statutory time limits, etc.), it is important that taxpayers are diligent in completing tax returns and ensuring they meet the criteria of being a full and true disclosure of all material facts necessary for the making of an assessment. Where there is doubt over an issue, be sure to document the position taken and seek professional advice where necessary.

We are here to help you

Revenue interventions and Corporation Tax disputes present many challenges for companies.

Our Tax Risk and Controversy team, which includes ex-Revenue officials, has deep expertise in all aspects of Revenue interventions, appeals, tax disputes and management of tax risk. Our expertise spans Transfer Pricing and all tax heads.

We are ready to help you navigate this challenging landscape, ensuring that the monetary, reputational and business risks that you face are carefully managed. Contact us today.