Advancements in Technology Are Driving Risk of Tax Controversy

Advancements in Technology Are Driving Risk of Tax Controversy

As tax authorities at the state and federal level pay greater attention to digital business models, and those authorities themselves adopt advanced technologies, controversy and enforcement now top all tax risk for 2016.

That's according to a new survey by EY of corporate tax professionals. In 2016, 35 percent of those surveyed said enforcement and controversy was their highest risk, switching places with last year's lead response, operational risk. To help manage that risk, corporate use of new software is seen as driving tax function effectiveness and better management of big data with real-time reporting and analytics.

Among the issues tax professionals consider important, data accuracy and availability was ranked number one by 25% of survey respondents.

"New technology is not just creating digital businesses, it's also transforming finance functions and creating a great opportunity for tax functions," said Kate Barton, EY Americas Vice Chair of Tax Services. "But tax must be involved in the design. Sixty-one percent of our survey respondents said that the best way to manage controversy was to involve the tax director earlier in the business transformation processes."

Controversy is also expected to increase due to international regulatory initiatives that demand country-by-country reporting. Countries adopting the OECD Base Erosion and Profit Shifting recommendations are not likely to be consistent. Sixty percent of respondents expect this lack of coordination to increase tax controversy.

In another use of technology, tax authorities are upgrading to digital platforms, demanding more consistent, timely, detailed and accurate reporting. To address these demands, tax functions are turning toward automation that manages big data with better integration with the rest of the finance function. When improving the tax function, 9% of those surveyed are using or custom developing more sophisticated software applications. Yet 39% of those surveyed still find templates of spreadsheets relatively effective. When more is needed, 49% rely on software provided by outsourcing, accountancies or professional service providers.

Tax reform is not the primary issue

During this election year, tax professionals do not see movement toward tax reform. Eighty-one percent believe the candidates are not spending enough time discussing tax issues. Another 9% said candidates focus too much on individual taxes instead of business taxes. The Democratic candidates are seen as communicating more of their thoughts about tax policy than the Republican candidates. Perhaps that lack of presidential election focus explains why 62% of survey respondents do not expect to see major tax legislation in 2017. Only 28% say tax reform is gaining traction compared to 34% who felt traction in 2015. Only 12% consider legislative uncertainty the priority risk this year (17% in 2015). The lack of progress was reflected in the respondents' top concern about today's international corporate tax structure: the tax rate relative to other OECD countries. Looking ahead, 64% of those surveyed do expect the rate to be lowered in the next five years. Read more: on CPA Practice Advisor.