27 January, 2021
The tax risk and controversy environment is changing. Over recent years, Revenue has significantly increased the level of resources devoted to audits and enhanced its risk profiling and data interrogation capabilities. As a result, Revenue interventions are becoming more challenging and are leading to more disputes.
We explore the factors shaping the landscape and the actions companies can take to proactively manage the monetary, reputational and business risks that can arise from their interactions with Revenue.
Confronting non-compliance is one of Revenue’s key strategic priorities. Revenue has taken a number of steps to ensure that it is better enabled to identify and challenge perceived high risk taxpayers.
Central to this is the recent realignment of Revenue’s operating structure. One of the drivers of the realignment was to ensure a greater match of Revenue’s resources to the risk segments across its case base. This led to a reallocation of resources across Revenue’s national divisions, with a significant uplift of headcount allocated to Large Corporates Division and Medium Enterprises Division. This suggests that it is Revenue’s intention to prioritise the audit of mid-to-large tier corporates.
Revenue’s sophisticated approach to risk profiling continues to be the driver behind its compliance activity.
Revenue has long been adopting a risk-based approach to select cases for intervention to ensure that its resources are targeting those cases that will give rise to a yield on an audit. Central to Revenue’s risk assessment is its extensive use of data. While taxpayer and third party filings provide Revenue with vast amounts of data, Revenue is now drawing more and more on information from external platforms.
This data is only as powerful as Revenue’s ability to interrogate and analyse it. To this end, Revenue has invested significantly in its analytics resources to maximise the use of the data and its capabilities in this space continue to evolve.
The Revenue audit process has become more complex and data-driven than ever.
This is largely driven by technology, with e-Audits now the norm on the majority of corporate audits. e-Audits involve the interrogation of large datasets of companies’ electronic records, making it easier for Revenue to detect anomalies that may indicate that there has been an underpayment of tax.
Furthermore, audits are now more data intensive. Revenue is increasingly requesting documentary evidence to support taxpayers’ filing positions and the absence of same can leave taxpayers exposed to Revenue challenge.
As such, the risks associated with an audit have never been higher. These can include:
It is vital that companies carefully and proactively manage the audit process to mitigate these risks.
It is already clear that the process is becoming more efficient. The TAC are issuing directions at a greater pace and encouraging both sides of an appeal to keep the process moving.
The Chairperson indicated that her expectation is that nine months is a reasonable period to allow the parties to prepare for a hearing. She has also indicated that she expects determinations to issue within one to three months of an appeal hearing. This means that an appeals process which formerly would be expected to be in the system for a number of years may now be resolved within a year.
Taxpayers will need to be mindful of this increased pace in the process. The 30 day deadline to file a notice of appeal with the TAC has not changed. The notice of appeal must set out all your grounds of appeal.
Finance Act 2020 has given the TAC extended powers to dismiss appeals where a taxpayer does not comply with its directions. These powers are likely to be used where taxpayers don’t engage with the TAC.
There has been a notable increase in cross border tax disputes in recent times, resulting in an increase in applications for assistance to Revenue under the Mutual Agreement Procedure (“MAP”) process to relieve double taxation arising from foreign tax assessments. While MAP is a government to government negotiation process, its success is dependent on the Irish taxpayer presenting a comprehensive MAP application to Revenue to facilitate these negotiations.
If the Irish taxpayer has settled the tax dispute unilaterally with the foreign tax authority and paid the foreign tax, then double tax relief must be sought through a correlative adjustment claim in the first instance rather than under a MAP. Irish Revenue’s preference is for taxpayers to engage in MAP over making correlative relief claims.
The most recent MAP statistics indicate that Irish taxpayers have realised this, and there has been a significant increase of 37 MAP applications in 2019 made to Irish Revenue.
The challenging audit environment, together with an increasing focus on tax governance at board level and the possible reputational impact mean that the risk of non-compliance has never been greater for companies.
So what steps can companies take to proactively manage this risk?
The establishment of a Tax Control Framework (“TCF”) is key to the management of tax risk. The TCF comprises various structures, arrangements and process controls in place to ensure that companies’ tax filings are accurate.
Key areas that companies 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 manage risks across various tax heads.
Once controls have been established, they should be regularly tested to ensure that they are being adhered to and remain effective in managing the underlying risks. Testing should be embedded into standard operational processes.
This testing approach should also ensure that companies satisfy their legal requirements under the Directors’ Compliance Statement.
The monetary and reputational sanctions arising from tax underpayments can be very serious.
By proactively regularising underpayments by way of a Qualifying Disclosure, companies can avail of significant penalty mitigation and ensure protection from publication in Revenue’s Tax Defaulters List.
Taxpayers have 30 days to file a notice of appeal with the TAC if they receive an Revenue assessment they disagree with, to avoid the tax becoming due and payable. The notice of appeal must set out all your grounds of appeal.
If taxpayers have already appealed to the TAC, it is important to engage in the TAC process as the TAC has the power to dismiss appeals where a taxpayer does not engage with the TAC process.
MAP is available to an Irish taxpayer if it has not yet settled a foreign tax dispute.
Before deciding whether to settle a foreign tax dispute or not, take the time to consider the options that will be available subsequently to seek double taxation relief. It may be advisable to appeal (to keep a domestic appeal avenue open) and seek MAP assistance rather than settle and seek a correlative adjustment.
Revenue interventions and disputes present many challenges for companies.
Our Tax Risk & Controversy team, which includes ex-Revenue officials, is highly skilled with a deep expertise in all aspects of Revenue interventions, tax disputes and management of tax risk.
We are ready to help you navigate through the challenging landscape, ensuring that the monetary, reputational and business risks that you face are carefully managed. Contact us today.